School of Business, Economics and Law Department of Economics Summer 2017
Impacts of Fairtrade on Small-Scale Cotton Producers
A field study in rural India
ABSTRACT The number of Fairtrade labeled products in the stores continues to increase and more and more consumers choose Fairtrade as an alternative to conventional products.
Fairtrade seeks to improve the livelihoods of small-scale producers and reduce poverty by implementing several standards for economic, social and environmental development. The aim of this thesis is to investigate the economic impacts of Fairtrade as well as the effects of Fairtrade on farmers’ standard of living. 101 farmers from the producer organization Chetna Organic in India were interviewed using a questionnaire. The impacts of Fairtrade are estimated through regression analysis, where positive statistically significant effects of Fairtrade on land productivity, credit use and perceived influence in cooperative are shown, while Fairtrade negatively affects food shortage. The farmers claimed to be satisfied with Fairtrade in spite of their limited knowledge of it, which makes it difficult to determine if Fairtrade is the actual cause of their satisfaction.
Authors Felicia Holm, Sara Lindgren
Supervisor Dick Durevall
THANK YOU
to all farmers in Odisha and Telangana, India,
for taking your valuable time to answer our questions, and warmly welcoming us to your homes,
to the producer organization Chetna Organic, for receiving us,
and organizing our stay,
to Abhijan, Prasant, Pattjoshi and Mujeeb, for assisting with translation,
and for taking care of us in the field, to our supervisor Dick Durevall,
for guidance,
to the Department of Economics at the University of Gothenburg,
for financial support which made this study a reality.
ABBREVIATIONS
CAPC Commission for Agricultural Costs and Prices CCI Cotton Corporation of India Ltd.
COAPCL Chetna Organic Agriculture Producer Company Ltd.
COFA Chetna Organic Farmers Association
EUR Euro
FAO Food and Agriculture Organization of the United Nations FLO Fairtrade Labelling Organizations International
GDP Gross Domestic Product GOI Government of India
ICAC International Cotton Advisory Committee INR Indian Rupee
OECD Organisation for Economic Co-operation and Development MSP Minimum Support Price
UNCTAD United Nations Conference on Trade and Development USD United States Dollar
USDA United States Department of Agriculture WWF World Wide Fund For Nature
CONVERSIONS
1 EUR = 72,3761 INR (June, 2017)
1 USD = 64,4098 INR (June, 2017)
TABLE OF CONTENTS
1 INTRODUCTION 1
2 COTTON BACKGROUND 4
2.1 Cotton as a commodity 4
2.2 Cotton production in India 4
2.3 Cotton market 4
2.4 Minimum support price as a government initiative 6
3 WHAT IS FAIRTRADE? 6
4 THEORY AND PREVIOUS RESEARCH 8
5 DATA COLLECTION 11
5.1 Description of data collection 11
5.2 Cotton farmer questionnaire 12
5.3 Semi-structured interviews 13
6 THE PRODUCER ORGANIZATION CHETNA ORGANIC 14
6.1 About Chetna Organic 14
6.2 Structure and operational area of the cooperatives 15
6.3 Sales process 15
6.3.1 Price and procurement of raw cotton 15
6.3.2 Price of lint cotton 16
6.3.3 Fairtrade income and expenditures of COAPCL 16
7 DESCRIPTIVE STATISTICS 17
8 METHODOLOGY 21
9 REGRESSION ANALYSIS 25
9.1 Econometric estimations of Fairtrade on profit and land productivity 25
9.2 Econometric estimation of Fairtrade on standard of living 30
10 DESCRIPTIVE ANALYSIS 34
11 CONCLUSION 36
12 REFERENCES 38
APPENDIX 1 42
Farmer questionnaire 42
APPENDIX 2 48
Correlation matrix for independent variables 48
APPENDIX 3 49
Correlations between dependent variables and their respective independent 49 variables
1 INTRODUCTION
During the past decades, the market price of cotton in real terms has fallen and is today only half of the price fifty years ago (World Bank, 2017a). Cotton is produced both in developed and developing countries, although the greatest cotton producer is India (USDA, 2017), where almost 6 million farmers are directly dependent on cotton cultivation (GOI, n.d.). Even though India is a fast growing economy, with a dramatically increased GDP per capita over the past forty years, the country still suffers from widespread poverty. According to the most recent poverty measure in 2011, 21.23 per cent of the Indian population still live in extreme poverty with less than 1.90 USD spent each day (World Bank, 2017b). The majority of the poor in India live in rural areas, where agriculture is the main source of income (World Bank, 2016b).
Several initiatives have been established with the aim to make cotton cultivation more sustainable for poor producers and one of these initiatives is Fairtrade. The Fairtrade Labelling Organizations International (FLO) started with standards for coffee production, with the purpose to reduce poverty among small-scale farmers facing tough trading conditions and improve their livelihoods (FLO, 2017). Fairtrade is a growing movement and the number of producer organizations working with Fairtrade continues to increase (FLO, 2016).
Nowadays it is possible to find numerous different Fairtrade certified products in the stores.
The amount of Fairtrade cotton sold has increased over the past years (FLO, 2015a). The increased Fairtrade cotton sales indicate a higher demand for Fairtrade cotton and a willingness among the consumers to improve the lives of poor. According to FLO (2016), cotton and sugar producers suffered the most from tough trading conditions in 2015, when the market price reached low levels.
The aim of this thesis is to examine to what extent Fairtrade can support cotton producers and cooperatives in India by implementing the Fairtrade measures, including minimum prices, social premiums, rights for the producers as well as environmental standards (FLO, 2017).
The two research questions outlined in the thesis are the following:
Are certified farmers better off economically compared to conventional farmers?
How does the standard of living for small-scale cotton producers improve when the Fairtrade
measures are implemented?
Most of the previous research on the impacts of Fairtrade has focused on coffee. This thesis will contribute to the research within the field by instead investigating the commodity cotton, as the impacts of Fairtrade may differ between different commodities. Volatile prices and strong dependence on weather conditions in rainfed cotton areas make the farmers vulnerable.
Agrarian suicides committed due to indebtedness have been a problem in India during the past two decades (Sadanandan, 2014). This thesis will expand the existing research on Fairtrade in order to determine if Fairtrade can contribute to improve the lives of poor cotton farmers.
The data used to investigate the impacts of Fairtrade on cotton farmers was collected during a field study in India from April to May 2017. Interviews were held with a total of 101 cotton producers belonging to the producer organization Chetna Organic. The sample consists of both conventional and Fairtrade and Organic certified farmers from four different cooperatives. Quantitative data was collected from all farmers as well as descriptive data from farmers with the certification.
To analyze the impacts of Fairtrade, conventional farmers are compared to Fairtrade and Organic certified farmers. To examine if certified farmers are better off economically, regression analysis is used to estimate the effect of Fairtrade on profit and land productivity.
Certified farmers do not receive higher prices for their cotton compared to conventional and consequently, Fairtrade does not increase profits directly. However, Fairtrade shows a positive statistically significant impact on land productivity, which is an important determinant of profit, after controlling for acres of land used for cotton cultivation, education and number of children.
To analyze if Fairtrade affects the farmers’ standard of living, regression analysis is used to estimate the effect of Fairtrade on food shortage, acres of land used for cotton cultivation, credit use and perceived influence in cooperative. The regression results show a negative statistically significant effect of Fairtrade on food shortage after controlling for gender, education, experience, number of children, land used for cotton cultivation, length of membership in Chetna Organic and geographical factors. There is no statistically significant effect of Fairtrade on acres of land used for cotton cultivation, after controlling for gender, education, experience, length of membership in Chetna Organic and geographical factors.
After taking into account the impact of the same control variables on credit use as well as
acres of land used for cotton cultivation, Fairtrade shows a positive statistically significant
effect. Moreover, Fairtrade has a positive statistically significant effect on perceived influence in cooperative after controlling for gender, education, experience, length of membership in Chetna Organic and acres of land used for cotton cultivation,
The thesis is structured into 11 different sections. Section 2 provides background information of the commodity cotton, the production process and the market for cotton. A more thorough description of Fairtrade with its standards follows in section 3. The next section presents previous research on the impacts of Fairtrade from an economic point of view. The 5
thsection provides a detailed description of how the data was collected. The next section provides information about the producer organization Chetna Organic. Thereafter, the descriptive statistics and how certified farmers differ from conventional farmers are presented in section 7, followed by a description of the method used for analyzing the data. The data is analyzed in section 9, where a detailed description of the regression analysis is provided. The farmers’
knowledge and perceptions of Fairtrade are presented in a descriptive analysis in section 10,
which is followed up by the conclusion in section 11.
2 COTTON BACKGROUND
The upcoming section provides relevant background information for the remainder of the thesis. It starts with a presentation of the commodity cotton, followed by statistics on cotton production in India. The section also describes the world market for cotton with current and historical world market prices. The Indian government is intervening on the cotton market by setting a price floor, which the last part of this section explains further.
2.1 Cotton as a commodity
There are around fifty different sorts of cotton in the world, of which only four is grown on a commercial scale (ICAC, 2017). The different species of cotton have varied staple lengths that are usually divided into short, medium, long or extra-long staple length and ranges from 12.7 millimetres to 39.7 millimetres (Cotton Incorporated, 2013). Cotton can be grown all year around and the cotton season ranges from 180 up to 300 days, depending on the climate and weather conditions. Cotton can be harvested several times during a season (ICAC, 2017).
Once the cotton is harvested, it is processed in a ginning unit where the lint cotton is separated from the cottonseed. Approximately a third of the raw cotton is processed into lint cotton and the rest to cottonseed (ICAC, 2017). Afterwards, the lint cotton is further processed along different stages in the supply chain including spinning mills, the weaving and knitting industry and lastly, the garment manufacturing (WWF-India, 2012). The cottonseed is not used in the garment industry. However, it can be used to produce cottonseed oil, used in for example cooking oils and margarine (ICAC, 2017).
2.2 Cotton production in India
During the agricultural year 2015/2016, India produced cotton on almost 40 per cent of the total world cotton area. India was also the greatest cotton producer during this period, and accounted for nearly 30 per cent of world production (USDA, 2017). In India, more than 5.8 million farmers cultivate cotton and around 40 to 50 million people are, in some way, working in the cotton industry throughout the supply chain (GOI, n.d.).
2.3 Cotton market
The real market price of cotton has decreased over the past decades. As shown in Figure 1,
there was a downward shift in the market price of cotton in the 1980’s and the market price is
currently lower than it was more than fifty years ago. The market price of cotton fluctuates
greatly also in the short run, as shown in Figure 2. There was a decline in world market cotton prices in 2015 but currently, the market price is increasing and India Ratings and Research (2017) expects stable future prices in India due to a steady supply and demand.
FIGURE 1. REAL LINT COTTON PRICES, 1960 - 2016
Source: World Bank, 2017a
FIGURE 2. REAL LINT COTTON PRICES, QUARTERLY
Source: World Bank, 2017c, 2016a, 2014, 2013 and 2012
In 2015, there was a great drop in world cotton production. According to OECD/FAO (2016), the main reasons for this decline were bad weather conditions as well as increased competition from synthetic materials, such as polyester. The prices on synthetic fibres are declining and therefore, these materials are increasing their competitiveness towards cotton (OECD/FAO, 2016). India Ratings and Research (2017) predicts a further increased shift from cotton to synthetic fibres in 2018.
0 100 200 300 400 500
US$/quintal
0 50 100 150 200 250
Quarter 1
2012 Quarter 1
2013 Quarter 1
2014 Quarter 1
2015 Quarter 1
2016 Quarter 1 2017
US$/quintal
Although the share of cotton is expected to decline due to the increased competitiveness, both OECD/FAO (2016) and India Ratings and Research (2017) expect an increased world cotton production. India Ratings and Research (2017) also predicts India’s share of the global cotton trade to increase, primarily due to better trade agreements with Europe and the United States, cost and quality competitiveness and a favourable monetary policy with declining interest rates and a stable currency. They have a positive future outlook for India’s cotton sector and expect the Indian cotton production to increase as well.
2.4 Minimum support price as a government initiative
The Indian government has initiated different minimum support price (MSP) programmes due to unstable prices of some agricultural goods. Generally, governments set a minimum price to ensure the producers to at least receive that price for their product. If the market price is below the minimum price, the government purchases the good to drive up the market price.
To keep the market price on this level, the government has to store or export the product, since the prices will decrease again if they sell on the domestic market (Perloff, 2014). The Indian MSP for a product is declared every season before sowing and is applicable to several agricultural goods, e.g. cotton, rice and wheat. When the Indian government decides on the MSP’s, they are analyzing the situation of supply and demand in the country and considering reports conducted by the Commission for Agricultural Costs and Prices (CAPC), who takes several factors into account. The current MSP during the agricultural year 2016/2017 for cotton with medium staple length is 3 860 INR per quintal, defined as 100 kilograms, and 4 160 INR per quintal for long staple length (GOI, 2016).
3 WHAT IS FAIRTRADE?
This section gives a presentation of Fairtrade and the history behind the Fairtrade Labelling Organizations International. The section introduces the aim and vision of Fairtrade as well as a description of the standards with which they intend to achieve these objectives.
The first Fairtrade label was introduced under the name Max Havelaar almost thirty years ago
by the Dutch organization Solidaridad. Since then, the same label has been implemented
across numerous countries in the world. The Fairtrade Labelling Organizations International
(FLO) was founded in 1997 in Germany with the purpose to unite all national Fairtrade
organizations and create a common certification with shared standards throughout the world.
The aim of Fairtrade is to reduce poverty in developing countries and empower producers and workers through better and fairer trading conditions (FLO, 2017).
The Fairtrade certification is obtained by the producer organization and not directly by the individual farmer. A product that is Fairtrade certified has to meet several Fairtrade standards regarding economic, social and environmental development. There are standards that buyers have to comply with as well as standards applying to producers (FLO, 2017).
The Fairtrade minimum price is decided by FLO and based on information from producers, traders and external reports regarding the cost of sustainable production. The Fairtrade floor price is the minimum price that must be paid to the producer, but when the market price is higher than this price, the buyer must pay at least that instead. The current Fairtrade minimum price for seed cotton differs depending on the variety and staple length of cotton, but ranges between 34 to 46 INR per kilogram for organic seed cotton in India (FLO, 2017).
Apart from the Fairtrade minimum price, the producer organization also receives an additional amount of money called the Fairtrade premium, which currently is 3.6 INR per kilogram for seed cotton produced in India. The Fairtrade premium should be invested in the local community and the producers decide democratically the exact utilization of it. Examples of how the premium can be used include investments in education, health clinics, infrastructure and training programs (FLO, 2017).
Towards the vision of creating a sustainable livelihood for the farmers, Fairtrade has set up other standards that the small producer organizations have to follow. The organizations should have a democratic structure and the managements should be permeated with transparency. Certain labour conditions have to be followed and child labour is not permitted.
The small producer organizations are also obliged to sign binding contracts with their buyers of the Fairtrade produced commodity. As environmental criterias, there are prohibited chemicals and materials that the Fairtrade farmers cannot use and neither are they allowed to cultivate Fairtrade crops using genetically modified seeds (FLO, 2011a).
The first buyer of the Fairtrade product is also required to provide pre-finance to the producer.
This enables the small producer organization to purchase the product from their farmers
(FLO, 2015b). According to the product specific standards for cotton producers, the Fairtrade
certificate holder can at any time demand a pre-finance of up to 60 per cent of the contract value from the buyer (FLO, 2011b).
To obtain a certificate, the producer organization has to send an application to FLO-CERT;
the independent certifier for Fairtrade founded in 2003. FLO-CERT carries out a physical audit at the producer organization and decides whether to certify it or not. After the producer organization has received the certification for its product, the certification body continues to do audits regularly, both announced and unannounced (FLO, 2017). The producer organization has to pay for the application fee, the initial certification cost, an annual certification fee as well as the audits performed by FLO-CERT (FLO-CERT, 2016). FLO- CERT also audits the traders to guarantee that the Fairtrade standards are followed (FLO, 2017).
4 THEORY AND PREVIOUS RESEARCH
This section introduces the economic theory of Fairtrade and presents results from previously conducted studies on impacts of Fairtrade. Formerly found positive effects of Fairtrade are described, as well as criticism towards Fairtrade.
According to Kadow (2011), Fairtrade producers provide the market with a differentiated good by producing economically, socially and environmentally sustainable in line with the Fairtrade standards, which creates a new market segment. Altruistic consumers are willing to pay more for products complying with the Fairtrade criterias. Kadow (2011) examines the welfare effects of Fairtrade in a Ricardian model of North and South trade and concludes that the overall welfare increases with Fairtrade. However, while the inequality between North and South decreases, it does so at the expense of non-certified farmers in the South. Kadow (2011) further suggests that welfare gains will only occur as long as Fairtrade is a niche movement, given limited demand.
The Fairtrade minimum price is set to guarantee the producer a fair price even in times when
the market price is low (FLO, 2017). However, when the price floor is higher than the market
equilibrium price, supply of the product will exceed its demand (Perloff, 2014). Since the
producers are not guaranteed a minimum price for their entire output with Fairtrade, the
excess supply will be sold at the lower market price. De Janvry, McIntosh and Sadoulet
(2015) get to this conclusion in their study using data from a Central American association of
coffee cooperatives. According to the authors, the excess of Fairtrade certification arrives from the free entry into the Fairtrade market with certification costs as the only barrier. The producers have to pay certification costs for their entire produce, while only a share of it can be sold on the Fairtrade market with additional benefits. As more and more producers enter the Fairtrade market, each farmer can sell a smaller share of his or her produce at the higher price, with a consistent given demand. Producers stop entering the Fairtrade market when marginal cost equals marginal revenue and the expected producer benefits are zero. Also, de Janvry et al. (2015) find evidence for their hypothesis that the net benefit of being Fairtrade certified is negative during times when the market price is higher than the Fairtrade minimum price.
Effects of the Fairtrade minimum price have been investigated in numerous studies. Valkila and Nygren (2010) performed fieldwork in 2005 and 2006 to study the impacts of Fairtrade on coffee farmers and cooperatives in Nicaragua. Since their study was conducted during a time with relatively high market prices, their findings showed modest effects of the minimum price on coffee producers. The farmers got similar prices on the outside market or even higher, if the coffee was sold at the right time. When the market price was low, most of the cooperatives could sell only a small share of their coffee on the Fairtrade market due to the excess supply previously discussed, and the minimum price therefore showed modest effects even in these times. However, some cooperatives succeeded to set up long-term contracts with buyers. These cooperatives were able to sell a significant part of their coffee on the Fairtrade market and benefitted from the minimum price. The premium for social development benefitted the larger producers more relative to the smaller producers, but Valkila and Nygren found it difficult to distinguish between effects of the social premium and effects of other rural development projects. They also concluded that the knowledge of Fairtrade was limited and that the farmers were confused with the different certifications, standards and development projects.
Another Fairtrade impact study was conducted by Ruben, Fort and Zúñiga-Arias (2009), with
a sample of 700 coffee and banana producers from two South American countries. Their
results show only small impacts of Fairtrade on farmers’ net income, explained partly by their
increased focus on the Fairtrade production relative to other income generating activities and
higher spending on hired labour. Instead, Fairtrade seemed to have more significant positive
effects on other factors. Fairtrade farmers spent more on long-term investments and were
more willing to take on risk, had better credit access and higher asset value, which Parvathi and Waibel (2016) moreover claim to be a better measure of wealth in the long run than direct income effects. In addition, Ruben, Fort and Zúñiga-Arias (2009) found positive effects of Fairtrade on the organizational strength, despite the once again proved limited knowledge of Fairtrade among the farmers. Apart from benefitting the participating farmers, Fairtrade also gave rise to positive externalities. Other farmers gained from higher and less volatile prices in areas with widespread Fairtrade production and the Fairtrade premium has potential to benefit whole communities, if used in the right way.
Decisions regarding the utilization of the Fairtrade premium is taken through a bottom up approach, where the farmers decide which community projects to implement. Such an approach has both advantages and disadvantages. The Fairtrade premium is likely to be invested in projects that meet the farmers’ own needs in the best way and the decision-making process also empowers the farmers. Nevertheless, it is not certain that the farmers always have the greatest ability to make those decisions. Shah, Mullainathan and Shafir (2012) suggest that scarcity of some resources affects people’s decision-making and impose cognitive load. If the mind is focused on one thing where resources are scarce, less attention is given to other problems and decisions due to the limited cognitive function. These findings suggest that poor farmers, who might put most of their effort into satisfying daily needs, have less ability to make decisions about the future, such as how to invest the Fairtrade premium most efficiently. It is possible that governments and aid agencies, with more experience, education and resources, would be able to decide on projects with a greater impact and which are more beneficial for the community in the long run. This argument is highlighted by Griffiths (2012), who advocates projects carried out by aid agencies because of their economies of scale and ability to reach a larger group of farmers than projects financed by the Fairtrade premium.
Increased trade can contribute to economic development and growth, which in turn can lead
to poverty reduction (UNCTAD, 2017). According to the theory of comparative advantages,
countries benefit from trade by exporting goods they are relatively good at producing and
importing goods that other countries produce better (Weil, 2013). The majority of the
international trade is between industrialized countries, and less between developing and
developed countries (Feenstra and Taylor, 2014). Fairtrade aims at creating fair trade linkages
between producers in developing countries and consumers, mainly in developed countries,
and by those means empower poor farmers and improve their economic situation (FLO, 2017). However, a study by Valkila, Haaparanta and Niemi (2010), investigating the value chain from coffee farmers to final consumers, finds that Fairtrade also benefits and empowers other actors along the path apart from the producer organizations. Their results show that a smaller share of the coffee price paid by the consumers ended up in the producer organization along the Fairtrade value chain, compared to the conventional. This may suggest that the Fairtrade system is not the most efficient way to transfer benefits from wealthy consumers to poor farmers. De Janvry, McIntosh and Sadoulet (2015) get to a similar conclusion in their paper, suggesting other institutions, which directly transfer benefits to the producers or organizations, as better alternatives for consumers wanting to make a contribution.
5 DATA COLLECTION
This section presents a detailed description of the field study. It portrays the interview locations together with a description of the sample and an explanation of the questionnaire.
The section also presents the semi-structured interviews as a supplementary method of data collection.
5.1 Description of data collection
The field study is made in cooperation with the producer organization Chetna Organic and it is based on 101 questionnaire interviews with cotton producers working with the organization. The interviews were conducted during the time period April to May 2017 in the two states Telangana and Odisha in India. The interviewed cotton farmers speak different local languages and therefore, field staff from Chetna Organic assisted with translation during the interviews. In addition to the farmer interviews, supplementary information required for the study was gathered at the head office of Chetna Organic in Hyderabad.
Telangana is situated in the south of India with around 35 million inhabitants. The state was formed in 2014 and is therefore the youngest state in India (Government of Telangana, 2017).
Cotton is one of the most important crops grown in Telangana (Reddy, n.d.) and is cultivated
on approximately 1 778 thousand hectares of land (CCI, n.d.). The neighboring state Odisha is
located on the eastern coast of India with a total population of almost 42 million people
(Government of Odisha, 2017). Odisha is counted as a low-income state and a third of the
population is living below the poverty line (World Bank, 2016b). Cotton cultivation is less
common in this state and approximately 136 thousand hectares of land are used to grow cotton (CCI, n.d.).
In Odisha, a total of 60 interviews were held with cotton producers belonging to three different cooperatives across two different districts and seven villages. The rest of the 41 interviews were held in one cooperative in Telangana with cotton producers from four different villages in the same district. Table 1 presents the characteristics of the four different cooperatives where the interviews were held. The sample consists of 81 farmers from three different Fairtrade certified cooperatives and 20 farmers from one cooperative without the certification. All farmers with the Fairtrade certification are also Organic certified, whereas the conventional farmers are cultivating with organic practices, but have not yet obtained the certification, which requires three years of organic cultivation.
TABLE 1. COOPERATIVE CHARACTERISTICS
Cooperative
Fairtrade certified
Organic certified
Members in cooperative
Male Female State District Village
Jagruti No No 2200 0 2200 Odisha Rayagada Badmanjurkupa
Gandhichuan Niyamgiri Yes,
2011
Yes, 2013
796 424 372 Odisha Kalahandi Bachka
Talkalsur Matrubhumi Yes,
2008
Yes, 2010
1414 978 436 Odisha Kalahandi Tentulipada Paria Bhimdanga Pragathi Yes,
2008
Yes, 2010
3266 1960 1306 Telangana Adilabad Patelguda Peddasakeda
Daboli Alliguda
The sample used in this field study might not be completely random. Chetna Organic or cooperative staff usually determined the farmers chosen for the interviews. It is possible that the selected farmers were those who could give answers in the most favourable light of Fairtrade and Chetna Organic and that all farmers therefore did not have the same probability of being chosen for the interviews. In addition, the field staff that assisted with translation during the interviews are not professional interpreters, which may have affected the results.
5.2 Cotton farmer questionnaire
The questionnaire for cotton producers working with Chetna Organic, shown in Appendix 1,
is set up to identify differences in the living standard and economic situation of those farmers
with Fairtrade certification compared to those farmers without Fairtrade certification. The
survey contains thirty questions based on the Fairtrade standards as well as results from previous studies and is designed to make it possible to distinguish impacts of Fairtrade on the cotton producers. The questionnaire is split up into five different sections, containing background information, information about cotton cultivation, income and expenditures, changes in the standard of living and economic situation as well as services and inputs provided by the cooperative.
The questionnaire is formed in a manner to allow data collection on other factors apart from Fairtrade that could affect the farmers and which are important factors to take into consideration according to previous literature. The questionnaire also consists of recall information, to enable a comparison between the before and after scenario of Fairtrade for the same farmer. However, this comparison is aggravated by the fact that the farmers got certified at different points in time, although the same number of years is used in the questionnaire.
The reliability of these answers can also be questioned, since it may be difficult for the farmers to recall the true information.
An additional eleven questions were asked to cotton producers with Fairtrade certification, in order to measure their knowledge about Fairtrade and to get their views on how they think Fairtrade affects them. These questions were modified after first tried in the Niyamgiri cooperative and later required more informative answers. Hence, answers from this cooperative are missing to some extent in the part of the questionnaire directly related to Fairtrade. This makes it more difficult to compare differences, e.g. knowledge about Fairtrade, which could depend on the length of Fairtrade certification. Even though the majority of the other farmers replied to these questions, answers are missing from some of them due to the farmers’ or accompanying field staffs’ lack of time.
The questionnaire also has some other drawbacks. A few of the questions are formulated in a way leaving room for some interpretation, and the responses are therefore difficult to compare. To avoid the risk of misinterpreting these answers, they are not part of the analysis later on.
5.3 Semi-structured interviews
Apart from the 101 interviews carried out, additional information was gathered through other
sources as well, in order to create a better understanding of how the producer organization
operates. The majority of this supplementary information was collected in conversation with Mrunal Lahankar, working as a Certification Manager at the head office of Chetna Organic.
The field staff in Odisha and Telangana gave details about the cooperatives. During the time spent in field, visits were performed to two of the eco-centres owned by the cooperatives used for setting up demonstration plots and plant nurseries for different crops, in order to see some results of the Fairtrade premium utilization. Chetna Organic also provided documents containing information about the organizational structure of Chetna Organic, utilization of the Fairtrade premium, cotton price data and cotton procurement details. Finally, to get further perspectives on how the cooperatives work, an in-depth interview was held with the president of one cooperative working with Chetna Organic. The president, however, is not part of any of the four cooperatives previously mentioned, in which the farmers were interviewed.
6 THE PRODUCER ORGANIZATION CHETNA ORGANIC
The following section gives a presentation of the producer organization Chetna Organic and their work with farmers and Fairtrade, together with a description of how the cooperatives are operating as well as how the sales process in the organization functions.
6.1 About Chetna Organic
The project Chetna Organic was established in 2004 by ETC India and Solidaridad, with the aim to reduce poverty and improve the living standard of small and marginal farmers across the states Maharashtra, Odisha and Telangana in India (Solidaridad Network, 2017). Chetna Organic started as a project with 234 farmers and has since the initiation increased its number of members working with sustainable agriculture practices to over 35 000 in 2014. Out of these, over 9 000 farmers are Fairtrade and Organic certified cotton producers (Chetna Organic, 2017a).
Chetna Organic consists of two organizations, Chetna Organic Farmers Association (COFA)
and Chetna Organic Agriculture Producer Company Ltd. (COAPCL). COFA is a farmer
owned non-profit organization for farmer support and implementation of development
projects. COAPCL is a commodity trading company with responsibility for the marketing
process with linkages to buyers on the national and international market. COAPCL holds all
trading licences and manages the certification of Fairtrade and Organic (Chetna Organic,
2017a).
6.2 Structure and operational area of the cooperatives
A total of ten cooperatives based in the states Maharashtra, Odisha and Telangana are working with Chetna Organic. The highest decision-making authority in each cooperative is the general body meeting, which is an annual meeting where the farmers gather to discuss the past year and decide on a plan for the following year. A board of fifteen members, which are elected on the annual general body meeting every third year, runs each cooperative. There must be a total of at least six female members in each board (Chetna Organic, 2017a).
Each cooperative is responsible for aggregating the raw cotton from its farmers (Chetna Organic, 2017a). Results from the interviews show that the farmers normally store their cotton at home until the harvest is completed. After the harvesting, a local market yard is set up in the village where the farmers deliver their cotton to the cooperative (Chetna Organic, 2017a). The cooperative is also in charge of the distribution of their Fairtrade premium amount. The board of each cooperative submits proposals regarding the utilization of the Fairtrade premium. Thereafter, the final use of the premium is decided by vote during the annual general body meeting. During this meeting, the farmers also have the possibility to present their own proposal regarding the use of the Fairtrade premium (Padhan, Jagujiban, president of Basumata Cooperative, personal interview, 5 May 2017). Furthermore, the cooperative has to provide trainings to the farmers, with support from COAPCL. Trainings are provided by all cooperatives three times a year and cover teaching about agricultural practices as well as Fairtrade and Organic certification (Chetna Organic, 2017a).
6.3 Sales process
6.3.1 Price and procurement of raw cotton
Once the Fairtrade and Organic certified cotton has been controlled by the cooperative at the
market yard it is sold to COAPCL. When COAPCL buys the raw cotton from the
cooperatives, they are paying the MSP plus an additional Organic premium of around five to
ten per cent of the MSP. If the market price for raw cotton is higher than this price, COAPCL
pays the market price instead. The prices paid by COAPCL to the farmers differ due to an
increasing market price throughout the agricultural year 2016/2017. The price paid to farmers
for their long staple cotton in the end of this period was 5 100 INR per quintal, while the
farmers who sold their cotton earlier received a lower price accordingly to the market price at
that time, starting from 4 600 INR per quintal (Lahankar, Mrunal, personal communication,
April and May 2017).
The farmers can choose to either sell their cotton produce through the cooperative or directly to other buyers. It is only the cotton produced by farmers with Fairtrade certification, Organic certification or Fairtrade and Organic certification that can be sold by the cooperative to COAPCL. Farmers in the first and second year with organic cultivation are not allowed to sell their cotton produce as Organic, but they can sell it as Fairtrade as soon as their cooperative becomes Fairtrade certified (Lahankar, Mrunal, personal communication, April and May 2017). The cooperative does not sell all the cotton produced by their farmers to COAPCL, even though it is both Fairtrade and Organic certified. The majority of the cotton the cooperative procures is sold on the conventional market to their own buyers, without receiving any additional benefits from the two certifications. During the agricultural year 2016/2017, COAPCL procured between 20 to 60 per cent of the total cotton produced by each cooperative (Chetna Organic, 2017b).
6.3.2 Price of lint cotton
After procuring the raw cotton from the cooperatives, COAPCL transports it to a ginning unit where the lint cotton is separated from the cottonseed. The lint cotton is thereafter sold to different spinning mills, which are also given the cottonseed at no cost (Lahankar, Mrunal, personal communication, April and May 2017). During the past agricultural year, the Fairtrade and Organic lint cotton was sold at prices between 11 700 INR and 14 100 INR per quintal. The Fairtrade and Organic lint cotton sold only as Organic, due to a lack of market demand for Fairtrade cotton, was sold at prices between 11 700 INR and 13 600 INR per quintal. The lint cotton was sold to four spinners and garmenting factories, which are the main lint cotton buyers of COAPCL (Chetna Organic, 2017c). These four spinners and garmenting factories in turn get orders from around 40 companies and retailers associated with the supply chain of Chetna Organic (Chetna Organic, 2017a).
Even though COAPCL only procured around 20 to 60 per cent of the total cotton produced by each cooperative, they were still not able to sell all of this on the Fairtrade market. This clearly shows the excess supply of the Fairtrade product, highlighted in previous studies (de Janvry, McIntosh and Sadoulet, 2015; Valkila and Nygren, 2010).
6.3.3 Fairtrade income and expenditure of COAPCL
The Fairtrade premium is distributed proportionally between the cooperatives, depending on
how much certified cotton produce COAPCL procures from each cooperative. The Fairtrade
premium is not allocated to the cooperatives every year, since the amount is usually too small to set up a project that can benefit a whole community. Instead, COAPCL saves the Fairtrade premium and uses it as bank collateral to get loans. After collecting the Fairtrade premium for a few years, it is paid out to the cooperatives that use it together with other funds to start community projects (Lahankar, Mrunal, personal communication, April and May 2017).
The total Fairtrade premium earned by the three certified cooperatives in the agricultural year 2016/2017 was approximately 2 million INR (Chetna Organic, 2017b). The average Fairtrade certification cost for each farmer, including the application fee, the initial certification cost, the annual certification fee and audit fees, is between 125 to 150 INR (Lahankar, Mrunal, personal communication, April and May 2017). Hence, the total annual certification cost for the three certified cooperatives is between 684 500 to 821 400 INR.
The Fairtrade premium, together with other funds, has been used for several different projects in the cooperatives. However, the Niyamgiri cooperative has only used the Fairtrade premium to purchase cotton seeds and offer seed loans to the farmers. More projects have been carried out in the Matrubhumi and Pragathi cooperatives where they, in addition to providing seed loans, purchased land where eco-centres were constructed (Lahankar, Mrunal, personal communication, April and May 2017). Additionally, the Pragathi cooperative used the Fairtrade premium to finance cooperative meetings and the aggregation of cotton (Chetna Organic, 2017d).
7 DESCRIPTIVE STATISTICS
This section presents descriptive statistics from the interviewed farmers and differences between conventional and Fairtrade and Organic certified farmers.
Table 2 describes the variables. It presents definitions of the variables as well as a description
of how the variables are calculated. The average price is used because it is not possible to
separate the prices paid by COAPCL from the prices paid by other buyers correctly. The
majority of the farmers stated that they sold their entire cotton produce to COAPCL, while
Chetna Organic later declared that they procured only around 20 to 60 per cent of the certified
farmers’ total cotton harvest. It is likely that the farmers were confusing who bought their
cotton since most of them sold all their cotton to the cooperative, which in turn sold it to
either COAPCL or other buyers. Therefore, the farmers cannot separate how much cotton was
sold to COAPCL and how much was sold to other buyers through the cooperative, if they did not directly sell to another buyer themselves.
The total cost of cotton production includes expenses of seeds, fertilizers, pesticides, labour and transportation of cotton inputs to the field. Most of the farmers use their own material from the farm to make fertilizers and pesticides, and therefore these costs are low or zero. The farmers pay a one-time membership fee to the cooperative of 50 INR when they join, but they have no costs related to Fairtrade certification, since this is financed by COAPCL.
TABLE 2. DEFINITION OF VARIABLES
VARIABLES DESCRIPTION
Age
Male dummy Education Experience
Household members Adults
Children
Years with Chetna Organic Land
Harvest Family workers Hired workers
Income share from cotton Trainings
Land productivity Price
Livestock
Food shortage dummy Consumption dummy Credit dummy Investment dummy Investment in land dummy Influence
Improved economic situation dummy
Age of the farmer in years
If the farmer is a male (yes = 1 and no = 0)
The number of years the farmer has attended school
The number of years the farmer has experience in cotton production The number of members in the farmer’s household
The number of adults in the farmer’s household The number of children in the farmer’s household
The number of years the farmer has been a member of Chetna Organic The total acreage of land the farmer uses for cotton cultivation The number of cotton quintals (defined as 100kg) the farmer harvested in 2016/2017
The number of family members working in the farmer’s cotton production
The number of hired labour working in the farmer’s cotton production The share of the farmer’s total income that arrives from cotton production
The number of agricultural trainings the farmer has received
The number of cotton quintals the farmer produced per acre of land in 2016/2017
The weighted mean of the average price the farmer received from COAPCL and the average price from other buyers in INR in 2016/2017 The total number of livestock the farmer owns
If the farmer has experienced a shortage of food during the past year (yes =1 and no = 0)
If the farmer has increased his/her consumption during the past five years (yes = 1 and no = 0)
If the farmer has received credit for cotton production during the past year (yes = 1 and no = 0)
If the farmer has made any long-term investments during the past three years (yes = 1 and no = 0)
If the farmer has made any improvements in land used for cotton cultivation during the past three years (yes = 1 and no = 0) The farmer’s perceived influence in the cooperative on a scale from 0 to 5
If the farmer thinks his/her economic situation improved during the past five years (yes = 1 and no = 0)
five years (ye
Table 3 presents the descriptive statistics to check the balance of the sample. It is divided into
conventional and Fairtrade and Organic certified farmers. The table presents the mean
differences between the two groups and at which level the mean differences are significant.
The mean differences between conventional and Fairtrade and Organic certified farmers are statistically significant for many of the variables.
As shown in Table 3, all of the interviewed conventional farmers are females while the vast majority of the certified farmers are males. Fairtrade and Organic certified farmers have more years of education and experience in cotton production. On average, conventional farmers have attended school for 1.1 years, while certified farmers have 5.4 years of education.
Conventional and Fairtrade and Organic certified farmers have on average 2.5 and 17.8 years of experience in cotton cultivation, respectively. While the households of conventional farmers consist of more children, the households of certified farmers consist of slightly more adults.
Conventional farmers belong to a cooperative formed relatively recently, and they have therefore worked with Chetna Organic for a shorter period, as shown in Table 3. Certified farmers own on average 1.6 more acres of land used for cotton cultivation, and they produced an average of 10.7 more quintals of cotton during the agricultural year 2016/2017, compared to conventional. Additionally, Fairtrade and Organic certified farmers use more hired labour for their cotton cultivation and their land productivity is higher. Certified farmers have received more agricultural trainings from Chetna Organic and are more dependent on cotton cultivation economically, compared to conventional farmers. This conveys the possibility that results from this thesis might look slightly different if all income-generating activities were investigated at once, instead of only cotton cultivation.
Table 3 shows that certified farmers earned a higher profit compared to conventional farmers
in the agricultural year 2016/2017. The profit was on average 17 631 INR for conventional
farmers and 62 763 INR for certified. The total cost of cotton production is higher among
farmers with the certification. However, the prices did not differ between conventional and
Fairtrade and Organic certified farmers. The Fairtrade minimum price has not impacted the
certified farmers since it is lower than the MSP set by the Indian government, and has been
since the agricultural year 2012/2013. This is in line with the study by Valkila and Nygren
(2010), where conventional and certified farmers received similar prices during a time with
high market prices.
As shown in Table 3, a substantially higher percentage of the conventional farmers experienced a shortage of food during the past year. Out of the conventional farmers, 85 per cent experienced a shortage of food during this period, while only 5 per cent of the certified farmers did. Despite this, an equal percentage of conventional and certified farmers stated that their economic situation improved over the past five years. In addition, there is no statistically significant difference between the two groups of farmers regarding how many of them increased their consumption over the past five years, or made any kind of long-term investment during the past three years. None of the conventional farmers made an investment in land, while 12 per cent of the certified farmers did.
A larger share of the Fairtrade and Organic certified farmers received credit for cotton production during the agricultural year 2016/2017, as shown in Table 3. 15 per cent of the conventional farmers received credit and 77 per cent of the certified. The farmers also differ regarding their perceived influence in their cooperative. On a scale from 0 to 5, conventional farmers have a perceived influence of 2.95 on average, while the influence among certified farmers is perceived to be 4.22.
TABLE 3. DESCRIPTIVE STATISTICS
CONVENTIONAL FAIRTRADE AND ORGANIC
VARIABLES
NMean Std. Dev. Min Max
NMean Std. Dev. Min Max Difference (Std. Err)
AgeMale dummy
20
20
41.400
0
9.093
0
23
0 55
0 81
81
44.284
0.877
11.014
0.331 23
0
65
1
-2.884 (2.665) -0.877***
(0.074)
Education
20 1.100 2.882 0 12 81 5.407 4.764 0 17 -4.307***
(1.115)
Experience
20 2.500 0.688 1 3 81 17.827 9.062 3 45 -15.327***
(2.035)
Householdmembers Adult
20
20 6.000
3.200
2.224
1.281 2
2 10
6 81
81 5.506
3.914
1.740
1.526 2
2
10
9
0.494 (0.460)
-0.714*
(0.370)
Children
20 2.800 1.881 0 6 81 1.593 1.340 0 5 1.207***
(0.364)
Years withChetna Organic Land Harvest Family workers Hired workers
20
20
20
20
20 3.800
1.550
3.975
2.750
2.100
1.795
0.626
2.473
1.293
1.861 2
1
1
1
0 6
3
11
6
5 81
81
81
81
81 9.185
3.191
14.645
3.198
4.457
2.491
1.288
7.475
1.470
3.863 2
1
2
0
0
13
9
40
8
30
-5.385***
(0.592)
-1.641***
(0.297) -10.670***
(1.699) -0.448 (0.359)
-3.357***
(0.891)
Income share from cotton Trainings Land productivity Price Total cost Profit Livestock Food shortage dummy Consumption dummy Credit dummy Investment dummy Investment in land dummy Influence Improved economic situation dummy
